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Thursday, November 19, 2015

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp9-10; Co-Author- Syed Md. Ismail

https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Q2%202015-16.pdf

Many
studies have indicated that Indians are now more vulnerable to non-communicable
diseases than communicable diseases due to changing lifestyles and income
levels. Cardiovascular diseases have displaced communicable diseases as the
biggest killer in India and, according to a 2010 University of Toronto study,
the leading cause of death in middle aged men is heart disease, even in poorer
states such as Uttar Pradesh and Bihar.

A sub-set of the claims data for the Financial Year 2013-14
available with IIB was used. The selected data comprised of claims where the
diagnosis code (ICD10) and the pincode of the hospital was provided. The
selected claims consisted of both Group as well as Individual policies. The
effects of Sum Insured or gender or age are not considered in this analysis. The
claims selected amounted to Rs.3,355 crores
of claims paid for 11,22,652 claims.

The analysis shows that circulatory diseases have the highest
average claims paid among all disease categories, accounting for 13% of claims
paid analyzed (Exhibit 1).

According
to a report published by the Indian Association of Prevention and Social
Medicine, “Decline in morbidity and mortality from communicable diseases have
been accompanied by a gradual shift to, and accelerated rise in the
prevalence of, chronic non-communicable diseases (NCDs) such as
cardiovascular disease (CVD), diabetes, chronic obstructive pulmonary
disease (COPD), cancers, mental health disorders and injuries”. The top 5 disease categories (out of 22 broad disease categories as
per ICD 10) which account for 51% of claims paid, in the sample under study
are, apart from circulatory disease, Injury (10%), Digestive (10%), Urology
(9%) and Neoplasm (8.5%) (Exhibit 1).

The
same report states that “though there have been substantial achievements in
controlling communicable diseases, still they contribute significantly to
disease burden of the country”. The amount of claims paid is relatively smaller
for Infectious diseases, but they account for largest number of claims as per
our analysis (Exhibit 1).

It was also noticed in our analysis that Mumbai accounts for the
largest number of health claims, accounting for 27% of the 11,22,652
claims studied, amounting to 30% of
the claims paid. The other large cities which account for significant number of
claims paid are Delhi (19%), Kolkata (14%), Bengaluru (12%), Chennai (11%) and
Hyderabad (10%), with others accounting for the remaining 5% only (Exhibit 2).

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp17-18

https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Q2%202015-16.pdf

As per the World Health
Organization (WHO), Mental health refers to a broad array of activities
directly or indirectly related to the mental well-being components included in
the WHO's definition of health: "A state of complete physical, mental and
social well-being, and not merely the absence of disease". It is related
to the promotion of well-being, the prevention of mental disorders, and the
treatment and rehabilitation of people affected by mental disorders.

Common forms of mental illnesses
include Depression, Anxiety/ Phobias, Eating Disorder and Stress, among others.
Some of the severe forms of Mental Illness are Schizophrenia, Bipolar disorder
(Manic depression), Clinical depression, Suicidal tendency, and Personality
disorder.

According
to National Institute of Mental Health and National Alliance on Mental
Illnesses,
in the US, 1 in every 4 persons suffers from some form of Mental Illness or the
other, while this statistic is 1 in 6 persons in India. The impact is that
people with mental illness die 25 years earlier than other Americans and more
than 90 percent of suicide cases are found to have one or more mental
disorders.

In a study done by BeyondCore, Inc. on people insured between the ages
of 18-35, in the USA, it was found that Mental Illness has a compounding effect
on claims (cost of treatment). For example, the annual cost for young adults
with heart failure was $42,000, for people taking antidepressants was $7,700,
but people who had both heart failure and were taking antidepressants had an
annual cost of $70,000 (see Figure 1).

Figure 1:
Compounding effect of Mental Illness

To the economy, the loss of earnings due to mental illness amounts to
US$193 billion per annum. Globally, depression alone affects 400 million
persons and was estimated to cost at least US$800 billion in 2010 in lost
economic output, by WHO, a sum expected to more than double by 2030. While such
statistics are not available for India, it will be reasonable to assume that
the impact would be significant.

In fact, the situation in India may be worse as acknowledging suffering
from some form of Mental Illness is culturally a taboo in India. On top of
that, the availability of help in terms of psychiatrists,
psychiatric beds, clinical psychologists, etc. is much below the required
numbers. For example, there are approximately 3000 psychiatrists in India
vis-à-vis a requirement of 150000.

Health Insurance policies also
exclude Mental Illness specifically. Extracts from the policy documents of a
few health insurance products read as follows:

“the following fall under
permanent exclusions: Any expense incurred on treatment of mental Illness,
stress, psychiatric or psychological disorders”

Insurance plays a key role in
Healthcare financing. Insurance is based on law of large numbers and there is no
denying the large number of people suffering from mental illness. The trouble
of course is that Insurance contracts are based on utmost faith and the
policyholder must disclose complete known information about his physical and
mental health at the time of buying the policy. The fear of inadequate
disclosure by the customer may deter the Insurers from offering policies on
Mental Health insurance.

Assessing the risks may remain a
challenge for the underwriters till adequate data becomes available. Collating
the data from various institutions like National Institute of Mental Health and
Neurosciences and the Institute of Mental Health and Hospital, Agra may help
the Insurance companies design appropriate products.

Use of innovative techniques may
come in handy to some extent. For example, social media analytics of an
individual may reveal suicidal tendencies or enquiries about specific problems
like depression, anxiety, etc. Sentiment analysis can help find people at risk.
These can then be verified with the customer and specific undertaking may be
taken from the customer if he does not agree with the findings.

Mental illness is also a major
cause for the high number of suicides in India. Intervention at the right time,
access to healthcare, along with health financing will play a major role in
talking the problem of suicides related to mental illness as well as prevention
of the illness getting aggravated. It is a serious issue and the Insurers can
play a major role to make a difference!

Wednesday, November 18, 2015

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp4-6

https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Q2%202015-16.pdf

Mr. Sushant Sarin is the Senior Vice President- Commercial Lines,
at Tata AIG General Insurance Co. Ltd. In this capacity, he is responsible for
profitably growing the Commercial Lines business of Tata AIG, leading its major
and corporate accounts practices and overseeing its broking and commercial
agency distribution.

Under Sarin’s
stewardship Tata AIG has been the leading Liabilities insurer for India Inc.
Sarin helped set up Tata AIG’s operations and as part of the start-up team one
of his assignments was to help bring to India Inc. the latest liability insurance
products used by industry world over.

A practicing Fellow of
the Insurance Institute of India, Sarin has close to 25 years of experience in
the General Insurance Industry. Prior to Tata AIG, he worked in various
capacities with United India Insurance Co.

Sarin is a graduate in
Science from St. John’s College and holds a Post Graduate Diploma in Management
& Marketing. His interests include long distance running, reading and
dramatics. He is currently reading “Miles to Run Before I Sleep” by Sumedha
Mahajan (Rupa Publictions, 2015).

In a conversation with Dr. Nupur Pavan Bang of the Insurance
Information Bureau of India, Sarin talks about the Unconventional Insurance
products which have gained significance in recent years due to the Social,
Regulatory, Technological and Environmental changes taking place globally and
in India, the challenges posed to the Insurers while selling such products and
while assessing losses.

An ASSOCHAM-Mahindra SSG study earlier this year warned that the number
of Cyber crime cases in India could rise to more than 3,00,000 cases in 2015,
growing at a compounded annual growth rate (CAGR) of about 107 per cent. In
such a scenario, Cyber Liability Insurance must gain importance. Is the growth
in volume (in terms of Gross Written Premiums) of Cyber Liability Insurance
products for the Insurance Industry, keeping pace with the increased number of
crimes?

Cyber Liability Insurance
is becoming very important nowadays, especially in the backdrop of rising
number of instances of cyber crime and cyber data breaches. Its growth in terms
of both premium as well as the number of policies being purchased has been
remarkable.

At Tata AIG, we
launched this product about two years back and the portfolio has grown to $2
million now. We see that more and more companies are buying Cyber Liability
Insurance. Those companies which were the first movers are buying more cover
and those who have not bought it yet, will start buying it.

However, when a client
is looking to buy a Cyber Liability Insurance, he is buying something quite
advanced and sophisticated. Tata AIG has the customers’ confidence in this
product and the market share is tilted in its favour.

As you mentioned, Cyber Liability Insurance is quite advanced and
sophisticated. How does a customer know what is the amount of Insurance or
“Limit of Liability” that they would like to avail of?

Cyber Liability and Cyber
Crime are often, though inaccurately, used as synonyms. Cyber crime refers to
any crime committed using computers or over computer networks. When we think of
cyber crime, we unwittingly limit our thinking to only those crimes committed
using computers or over computer networks, that are related to theft and
robbery of money or securities. However, confidential data or personally
sensitive information such as that related to customers’ passwords for
financial transactions, bank account numbers, confidential medical records,
etc. are also very valuable and theft of such data or information can have dire
consequences for a company or an individual.

For example, for a
Bank, if someone accesses data of a Bank’s customers in an unauthorized manner,
he can get into the account of any bank customer and do whatever he wants to do
with the money lying in the account.

So information or data
is very valuable. That’s why insurance
for financial consequences of data breach, that is, Cyber Liability
Insurance, becomes important.

Coming to how do
companies know what should be the Limit of Liability for which they should buy
insurance, this depends upon factors like the type and volume of data, origin
of data, location where the data resides, sensitivity of the data, data
security protocols, peer group benchmarking, etc.

So if the data
originates from Europe or the US, the data privacy laws are stricter there, so
more Insurance will be required. Similarly, if the data is personally sensitive
or creates financial vulnerabilities, the amount of Insurance required will be
much more.

How does the Insurance Company assess the loss if a data breach does
happen? What are the kinds of losses that are covered by such a policy?

When money is stolen,
like in the case of a recent event where a Bank discovered a fraud to the tune of
a few Crores of Rupees due to fabricated credit cards, the amount of loss
suffered is a straight forward calculation and this amount will be paid by an Insurance
Company if the Bank has a policy covering such fraud.

However, a data breach
is more complex. Cyber crime which results in a data breach may typically get
discovered much later than a cyber crime where a specific amount of money is
stolen. When it does get discovered, the following issues confront the company
and lead to costs, expenses, fines, penalties and liability being incurred by
the company:

How did the data go out? Forensic investigation would
need to be done and it is very expensive

Cost of notifying the customers, that is, data
subjects, about the breach; notification costs form a very large part of the
financial costs following a data breach

Regulatory bodies may impose a fine or penalty;
the policy pays for these if these are insurable under law

Customers or data subjects may sue the company. Courts
may awards damages to be paid to each of the affected customers

Reputation loss- a public relations expert may
need to be hired to salvage the reputation of the Company and / or its Data
Security Officer

The policy covers
these and other financial consequences. The
total of these losses is the amount payable under the policy.

The year 2015 saw bans on popular food products in India. For a company,
when operating in a country like India, where the regulations at times may
border on being in grey, rather than black or white, Product Liability
Insurance becomes important. What are the main features of such a policy?

A lot of awareness has been created in recent
times about product safety and quality and of Contaminated Product Insurance as a related risk mitigation measure.
Product recall is very generic Insurance Policy. A product can be recalled for
any number of reasons. It could be defective or dangerous or any other reason. Contaminated
product insurance is a policy specifically created for products which are for consumption
by people as consumption by human beings poses a high degree of risk if the
product is unsafe or harmful. The policy covers the cost of recall, cost of
additional warehousing, extra manpower, disposing of extra packaging and point of
sale material, cost of engaging with a Public Relations agency to undo the
damage to reputation and brand to re-establish market share, loss of profits
because of business interruption following the incidence of contamination, malicious
product tampering and product extortion etc.

What if the policyholder (Company) doesn't disclose that a certain
product is contaminated? Will the Insurance Company still be liable to pay the
claims?

Insurance policies are
for fortuitous /accidental events even if caused due to negligence. Intentional
or known defects are not covered.

Directors’ and Officers’ (D & O) Liability Insurance is another
product which should have picked up in 2015. With cases of harassment in work
places on the rise and complaints on high profile executives grabbing the media
attention, are more and more companies opting for D & O Liability
Insurance?

D & O Liability
Insurance is no more an option. Everyone is buying it. No company is secure
till they buy a cover protecting management against personal liability for
managerial actions.

Is loss of a company’s CEO covered under an insurance policy?

For this, we must
consider two different types of insurance products that deal with two very different
types of exigencies.

One type of policy
which is popular is Key Man Insurance.
Such policies are sold by Life Insurance companies and are generally taken by a
company on the life of key employees to cover the company from the sudden loss
of a ‘Key Man’ that results in financial loss to the company.

As far as a D & O
policy goes, it would protect the directors and officers of a Company if the
company were to lose a dynamic successful CEO to say, competition. The
profitability of the company and hence the share prices could take a beating.
The shareholders may sue the Board of the company for not doing enough to
retain the CEO and may demand compensation for their losses. D & O
Liability Insurance would come into play here.

How does the Insurer price D & O Liability Insurance? What are the
factors that are accounted for when underwriting and pricing the product?

It is the collective
outcome of many factors like the performance track record of a company, its
asset size, whether the company is listed or not, if listed whether the listing
is in India or abroad, say US or UK, compliance record, disclosure standards, the
nature of business, the nationality and profile of employees, etc.

Insurance is mainly meant to mitigate the losses that a
company/individual may face if certain events happen. If we go by this
definition of Insurance, then many Multinational companies operating in India
may want to buy a cover for Tax related risks. Is there a product in the market
which covers Tax risks?

Talking of tax levies
in general, tax is levied by law. If tax that is to be levied is not deducted,
collected or paid, whenever it is detected, it will have to be paid. There is
no fortuitousness about it. However, when there is a transaction like a merger
or an acquisition happening, the tax position under law may not be clear. If the
law is not clear, for such very limited situations, Tax Indemnity Insurance is
available. It is by its nature a customized policy. Very few insurers have the capability
to write such policies.

What is the recourse for companies which are faced with retrospective
taxes being levied on them? Tax risk is certainly not something that any of
these companies would like to carry themselves.

Other than insurance
for the limited situations where the tax position in a transaction may not be
very clear, there are no blanket or omnibus tax insurance policies. Retrospective
changes in laws will not be covered by Insurance.

Ace investor Mr. Rakesh Jhunjhunwala, in an interview to CNBC TV-18,
earlier this year, expressed his concerns about the valuation of e-commerce
companies in India. In the recent past, there have been more voices expressing
concerns about the high valuations of the e-commerce start-ups and it is being
likened to the Dot Com Bubble of 2000. If there indeed is a bubble, and it
bursts, the Venture Capitalists (VCs) and Angel Investors (AIs) would be the
ones to lose maximum money. In such a scenario, do see a need/demand for a
product to cover the risks being faced by VCs and AIs?

VCs and the AIs do a
lot of due diligence before they invest. Arriving at a reasonable valuation is
part of their business and they must take that risk. But if the due diligence
is not done appropriately, and limited partners lose money because of the
negligence of general partners, professional indemnity insurance coverage under
the VC Protector policy will be useful.

This article was first published in the IIB Bulletin, Vol 2, Issue 1, pp6-7

https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Volume%202%20%20Issue%201%20Final.pdf43% of the estimated approximately Rs5000 crores
fraud in the General Insurance Industry in India, as per the India Forensic
center research 2011, is accounted for by the Motor Insurance Business. Staged
thefts, Overstating damages/claims, multiple claims for the same damage through
multiple Insurance companies and the misuse of No Claim Bonus (NCB) are just a
few examples of fraud in Motor Insurance.

If a policyholder does not make a claim during the
previous policy year, a discount on the premium is given to reward the
policyholder while renewing the policy. However, if a claim is made, the
discount is not given. In such a scenario, the policyholder may go to another Insurance
company and take a policy on the vehicle, without disclosing the previous
claims.

In a Simulation exercise done using hypothetical
data, done by the Insurance Premium Rating Bureau, Thailand, it was found that
giving higher NCB can have a serious impact on the loss ratio of the companies.
For example, in figure 1 below, 155,876 vehicles came up for renewal in
Underwriting Year 2010. Out of these, 71,907 vehicles should not have got a
NCB. However, only 19,514 were not given NCB. Rest of the 52,393 vehicles got
NCB in the range of 20% to 50%.

Figure
1: Simulation of NCB 1st Year Renewal

Figure
2: Simulation of NCB 4th Year Renewal

These charts were first
presented at the Insurance Information and Ratemaking Forum of Asia, 2015 in
Kuala Lumpur, Malaysia on May 28, 2015 by Chutatong Charumilind and Konthorn
Chainiwattana, Insurance Premium Rating Bureau, Thailand. Reprinted with
permission.

Similarly, when these vehicles came up for renewals in subsequent
underwriting years, some vehicles were always awarded NCB that they did not
deserve. The resulting Loss Ratio for such vehicles, which were consistently
awarded wrong NCB, was a whopping 164% to the Insurer.

Plugging in NCB leakage is hence extremely important for the
Insurers.

Vehicle Claims History Search is a service provided by IIB to
Insurers, which is aimed at removing the information asymmetry between the
Insurer and the policyholder with respect to the previous claims. The use of
this service would ensure that vehicles which have had claims in the past are
not rewarded with No claims bonus. The Vehicle Claims History Search facility
also brings in efficiency as the Insurers do not have to depend on the previous
Insurers for verification of claims, it is a low cost option which can also be
integrated to the policy management system of the Insurers through the web
service provided by IIB.

Mr. Ian J.
Watts is the Senior Vice President and Managing
Director, International Operations for LL Global, Inc[1].
As head of LIMRA and LOMA’s International Operations, Watts is responsible for
developing and expanding business opportunities in Asia, Latin America, the
Caribbean, Europe, Africa and the Middle East.

Prior to joining
LIMRA and LOMA, Watts was Global COO at ACE Life International, where he was
responsible for day-to-day operations and new business development. He has held
CEO positions in India and China for AIG and AIA and has extensive global
experience in the UK, EMEA and Latin America. Watts was educated at
Loughborough University College, earning a Business Education Council Diploma.

In a conversation
with Dr. Nupur
Pavan Bang of the Insurance Information Bureau of
India, Watts talks about research in the Life Insurance sector, in India and
globally.

In what way can
the Life Insurance companies in India benefit from being associated with LIMRA
and LOMA?

We can bring to the Indian Insurance market the global best
practices and also world class education and development programs. Insurance
companies in India still have a lot to achieve in terms of improvements in
distribution productivity and profitability. We can bring quality experiences
and proven systems from around the globe and help the situation here.

LIMRA does not do much
research on the Indian market.

Yes. The historical research is primarily US based. In the US, there
is decades of experience on trends. We can even track generation wise exposure
and experience. Many US research studies now include global data. But now,
strategically we will do more of international research, including surveys and
studies in India.

What would be the focus of
your research in India?

The focus in India is on Consumer trends and preferences with
regards to purchasing Insurance. As we
work more closely with the Insurance Companies in India we will be well placed
to conduct research that helps the industry continue to grow and develop. India
has a large rural population and selling to this sector is a challenge but also
opportunity for the Industry in India. Understanding the India Consumer
purchase preference will be a focus of further research.

Distribution Channel plays
an important role in determining the purchase behaviour for Insurance. What is
the preferred distribution channel for Indians?

We found that while many Indians (same as the Chinese) might go to
Facebook, Twitter, and other social media sites to do research on which
Insurance product to buy, they still prefer “face to face” purchase of Life
Insurance. This is because the products are perceived as complicated and need
explaining by the Advisor.

What are the challenges
with Distribution Channels globally?

Agents are still the most preferred distribution channel even in the
US and Japan which are amongst the most matured Insurance markets. And you know
that it is the most preferred channel in India. However, the challenge is that
most of the Agents are now in the age group of 55-65 years. There are fewer
agents joining the agency force every year but Consumers still prefer to
purchase Insurance from an Agent. The older Agents may not know how to
communicate effectively to Gen X & Y Consumers. Companies are focussing on
how to attract and retain Gen X & Y Agents.

You have been both in India as well as
China with AIG and AIA. What has been the experience? How do the two countries
differ with respect to the Life Insurance market?

There are many differences and similarities between both important
and large markets of India and China. A large population with a growing middle
class, good economic growth and lower Insurance penetration rates are some of
the similarities highlighting the opportunities for both markets. In India
companies require only one licence to operate across the country whereas in
China each Province requires a new license. Agency productivity is generally
better in China as the companies there have been adopting global best practices
for many years. Consumers in China are more comfortable purchasing Insurance
via the internet than any other Asian market including India.

What are the global best
practices that India must adopt?

LIMRA and LOMA can bring many proven global best practices to help
the Indian Insurance companies improve their productivity and therefore
profitability.

Scientific selection of Agents and sales
staff helps companies identify those candidates most likely to succeed in an
Insurance sales role. This then allows companies to invest in their best
talent.

Effective and regular training and
development of producers and employees improves their productivity and
increases retention rates.

Compensation is a major driver of behaviour
so aligning compensation to required behaviours is an effective best practice.

It is important to establish a management
process and recognition framework within distribution channels and the
organisation as a whole so lower performance is corrected early and higher
performance is recognised effectively.

Technology plays an important role for
Insurance organisations to reduce operating costs and connect closer with
Consumers and customers.

[1] LIMRA,
a worldwide research, consulting and professional development organization, is
the trusted source of industry knowledge; helping more than 850 insurance and
financial services companies in 73 countries increase their marketing and
distribution effectiveness. Together, LIMRA and LOMA provide the most
comprehensive competency-based training solutions in the industry.

Sustained increases in price are often due to rising
demand for existing production, when the former outpaces the productive
capacity of an economy. With high money circulation, one has more money to
spend and invest, but production is unable to expand in response. Prices must
now rise to bring equilibrium to the market, by incentivizing producers to
increase production.

If the economy is already at full capacity of output, employment
and production increase becomes difficult. In order to employ more workers,
wages must rise, which increases the incomes of workers, who then become better
off and contribute to a further increase in demand, and the cycle continues.
Unless the central bank intervenes, or another external factor brings in
moderation, the process is exacerbated.

However, if the economy is not functioning at full
capacity, the price rise due to excess demands puts an upward pressure on
production- supply rises to meet demand and price increases gradually. But,
this might lead to outright price decline as well. A drop in price would imply
that the demand is too little to meet the current increased output levels. This
would then result in downsizing, less money in the hands of employees, hence
less disposable income for consumers, leading to even lower demand, hence price
cuts.

So the see-saw of demand and supply keeps moving the
prices up and down!

In the short run, inflation is about the shifts in
aggregate demand with respect to aggregate supply; in the long run, inflation
is a function of the Central bank’s policy measures and discretion in
conducting fiscal policy.

By definition, inflation refers to a persistent rise
in the general level of prices in an economy. By gauging the rate of inflation
or deflation (a negative rate of inflation, referring to a decline in the level
of prices, which occurred in the previous example when supply outpaced demand,
and may culminate in depression) present or anticipated, producers and
consumers are given the means to measure the cost of production and living.

Most often, inflation refers to price inflation, as
opposed to monetary inflation which refers to the significant increase in the
money supply. Consumer Price Index (CPI) is the key measure of inflation in
India.

CPI measures the cost of consuming a standard basket
of goods and services over a particular period. Through this index, one can
evaluate the cost of living in a particular economy. For example, if the
weighted average of the basket in 2013 was 200, and 206 in 2014, the rate of
inflation in 2014 would be 3 per cent.

The standard basket includes food, clothing, shelter,
fuel, transport, healthcare and other day-to-day purchased goods and services
for rural, urban and combined groups. The weights for each component of the
Consumer Price Index basket is determined by their importance, as surveyed by
consumers’ total spending on that item (See Chart 1).

CPI is a rather stable index. It is not susceptible to large changes,
and its basket items are constant, reflecting the standard items consumed by
domestic households.

As such, inflation pegs down
currency value, re-allocates resources, reduces potential economic growth and
leads to the attrition of gross domestic savings, with less capital formation
in the economy. But how are individuals really impacted by the inflation?

High inflation leads to higher
interest rates; people in need of loans and mortgages find it difficult to
borrow with increased costs of borrowing. For example, banks increase rates on
existing borrowers of home loans during times of inflation. As home loans are
mostly taken at floating rates, most customers are wont to pay more EMI per
month.

When saving for retirement,
education, housing, or any other plan in the foreseeable future, the rise in
cost is a massive risk: buying may cost more in the future than today.
Inflation distorts future goals and savings.

A bigger (if not the biggest)
risk of higher inflation is posed to the lower and fixed income families.
Prices for food and utilities such as water and fuel rise at a rapid rate. Usually, being short of cash, more people use
credit cards and get into a debt trap, having to take personal loans- more EMI
to pay; and budgets are incisively cut for most of the lower and middle
classes.

The issues associated with
inflation form a double-edged sword: while prices are higher, declining one’s
buying price, non-fixed income groups can benefit from increases in income
(however, if income increases at a rate less than the rising price rate, buying
power still declines).

This is why economically
worse-off individuals bear the most significant brunt of high inflation, as
they are less able to insulate themselves and hedge against the risks and
uncertainty posed during inflation.

Investors in debentures and
fixed-interest securities, bonds, etc. lose substantially during inflation.
Similarly, retail investors with stocks in inflation-sensitive companies such
as automobiles are likely to see stock prices decline as people prefer to not
spend discretionary money.

Inflation is known as the Worst
Tax because its effects often go unnoticed with the focus on nominal earnings
rather than real earnings. If inflation is rising at 9 per cent, and one earns
6 per cent in a savings account, one may feel 6 per cent richer, when in fact one
is 3 per cent poorer. Real incomes of wage earners sharply decrease, especially
when wages do not rise at the same pace as the general price level, thus
increasing the real cost of living.

As the value of national savings
drops with less money to save now as people spend a greater part of their
disposable income, individuals are left with little money to spend on any other
activities.

In recent years, inflation has
been perceived as a serious problem owing to public confusion about what
inflation is and how to make adjustments for it. However, what is certain is
that Inflation makes it difficult to make decisions about future expenditure,
investment, and production with respect to current prices.

Big Data Talent Gap is a serious problem. Recognizing
it, Universities are introducing courses on Analytics and Big Data. This has
resulted in a larger supply of people who are well versed with data
manipulation, handling and running codes. But, it has created a gap of another
type. In an article on “Three Problems All Data Scientists Experience”, Drew
Farris of Booz Allen Hamilton Inc. writes that “…problems go beyond technology
and machine learning and are broadly encountered regardless of the task at
hand: interpreting the problem, sourcing the data, and describing the
outcomes”.

A lot of new joiners in analytics teams across
companies face a serious problem especially while describing the outcomes. They
fail to understand what their effort will lead to? This effort could be the
software code they are working on or the project module that is assigned to
them. Why only new joiners? Even employees with 6 to 7 years of experience find
it difficult to look at the big picture. The institutes where they learn these
analytics’ techniques are partially to be blamed. They are taught to play with
the software. It could be coding or working on the dime a dozen graphic user
interfaces that are available. They understand how to handle data, get the
results and interpret the data. How this interpretation would lead to business
gains or efficiency gains is not clear to them!

A simple example could be a segmentation exercise
where the collected data is used to segment customers into various groups.
These groups could be divided demographically or by using the customers’
choices and preferences. Once this segmentation is done, each segment can be
profiled both on the basis of demographics and choices. Up to this point, all
analytics greenhorns would do a perfect job. The next step is where
complications arise. When they present this to the client, the client enquires
about the usage of this exercise. They do not have an answer to this. If they
can tell the client how each segment can be uniquely targeted using specific
marketing campaigns and what amount of efficiency gains they would achieve, the
client would be delighted. If this is done correctly, apart from the short term
gain of client appreciation, they can expect long term career growth
opportunities.

With so much of data available through various
sources like smartphones, internet and social media sites, the requirement for
experienced analytics professionals is bound to grow. The beauty of the
situation is that this data availability is only going to increase with the
advent of internet of things. In internet of things, devices will talk to each
other with an app on your smartphone helping you to switch on your television
and air conditioning just before you enter your home. A stage will come when
the data of your home arrival times can be analyzed and the app will trigger
the switching on of your devices
automatically without you even tapping it.

We also keep hearing of big data silos across data
stores within the same organization. This happens because people with skills in
data analytics do not understand which problem can be solved using the unified
data. If they can be exposed to such problems and solutions, a lot of data can
be unearthed from data warehouses and used productively.

There is an urgent need for institutions teaching
analytics courses to equip their students with the ability to look at the
larger business problem and then use their data skills to solve that. Instead
of starting with the data, they should start with the business problem and
while working on it they should not miss the woods for the trees. This can be
done easily when the focus is on the business problem and not on the data.

The Wholesale Price Index for May 2015 stood at minus
2.36 per cent, continuing its downward trend since the last seven months. The
Consumer Price Index stood at 5.01 per cent, well within the range of 2-6 per
cent targeted by the Reserve Bank of India. With the release of these figures
on June 15, 2015, the demand for a further rate cut have resurfaced.

The industry associations like Confederation of
Indian Industries and FICCI have already issued statements to the effect that
Reserve Bank of India should continue the “rate easing cycle” to “support
demand”.

Repo Rate

Earlier this month, on June 2, the Reserve Bank had
cut the Repo rate by 0.25 per cent, third time this year. Repo rate (short for
‘Repurchase Agreement Rate’) is the rate at which the central bank lends money
to commercial banks.

When banks experience a shortage of funds, they may
borrow money from the RBI. When the RBI increases the repo rate, it becomes
more expensive for banks to borrow money, creating a ripple effect that affects
businesses and individuals.

Higher the interest rates to acquire loans, lower the
profits yielded, which may result in spending cuts and a slowdown in the
overall growth of companies.

Similarly, an increase in repo rate results in banks
increasing their interest rates charged for consumer loans as well, thus
reducing the purchasing power of individuals. The diminished ability for
consumers to spend discretionary money results in reduced demand for goods and
services and affects businesses as well.

Stock Markets

Stock prices are a function of business operations
and expectations people have viz. companies at different points in time. If a
company is seen cutting back on spending or making less profit, the
expectations of people from that company may go down, resulting in a lower
demand for the shares of that company. With decreased demand for the shares of
a particular company, the share prices start to fall.

When a macroeconomic factor, such changes to the repo
rate, affects the entire market, the indices (like Nifty or Sensex) would go up
or down, representing the impact on the market as a whole.

Therefore, when the repo rate is cut, the general
effect is an increase in the amount of money in circulation, which makes the
stock market a more attractive area of investment.

(However, it is important to note that repo rates are
not the only determinant of stock prices and market trends. It must also be
noted that the stock markets represent only the organised (listed) sector of
the economy. And the indices only represent some of the largest companies
listed on the stock exchanges).

Market
Reaction

Usually,
as in January 15 this year, a repo rate cut should create a positive effect in
the stock market.

On June
2, the RBI governor cut the repo rate by 25 basis points to 7.25 per cent.
Raghuram Rajan announced, "Banks have started passing through some of the
past rate cuts into their lending rates, headline inflation has evolved along
the projected path, the impact of unseasonal rains has been moderate so far,
administered price increases remain muted, and the timing of normalisation of
US monetary policy seems to have been pushed back. With low domestic capacity
utilisation, still mixed indicators of recovery, and subdued investment and
credit growth, there is a case for a cut in the policy rate today."

The
markets had been expecting a rate cut and had started to factor its positive
impacts in the stock prices even before June 2. See figure 1 below.

The market had moved up by 1.37% on May 29th, 2015 and
remained flat on June 1st, in anticipation of a rate cut. However,
in spite of the rate cut on June 2nd, the NIFTY fell by 2.36% and
continued its downward trend for the next five trading days.

Why did this
happen?

This happened because of the cautious stance of the RBI. The fall
in stock prices was because the investors had already expected the third repo
rate cut this year and had factored it in, anticipating, in fact, a 50 basis
points repo rate cut.

The uncertainty with regards to monsoons which may result in food
inflation if not managed properly by the government, rising crude prices amidst
considerable volatility and geopolitical risks, and volatility in the external
environment, were cited as the reasons for a 25 basis point rate cut rather
than a 50 basis point rate cut.

Therefore, overall guidance from RBI was not that of a ‘cheer
leader’.

Rate cut
again

RBI’s various statements and interactions with the media indicate
that further rate cuts in the near future is unlikely. However, with inflation
figures expected to be well within RBI’s target, there may be room for further
rate cut. Though, RBI would be watching the monsoon and crude oil prices like a
hawk before any decision is taken!